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Why Is Cliffs Going to Idle Iron Ore Pellet Production?

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Idling Northshore Mining

Cliffs Natural Resources (CLF) announced on November 17 that it is going to temporarily idle iron ore pellet production at its Northshore Mining operation in Minnesota by December 1, 2015. In our previous analysis of Cliffs’ 3Q15 results, we stated that Cliffs Natural Resources’ US Iron Ore Volumes Have More Downside.

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State of the US steel industry to blame

The company stated that until its customers’ capacity utilization improves, the existing customer demand will be satisfied from its iron ore pellet inventory. This is Cliffs’ second plant to be idled in a matter of four months. Earlier, in August 2015, it idled its United Taconite mine. The company expects both plants to remain temporarily idled through the first quarter of 2016. In the meantime, it will continue to operate its Hibbing Taconite mine in Minnesota and Tilden and Empire mines in Michigan.

Cliffs’ Northshore Mining Company has a mine and a taconite pellet processing facility located in Minnesota. This operation employs 540 employees. Cliffs will maintain minimal staffing during the temporary shutdown period for basic maintenance duties. Cliffs’ share price had a strong negative reaction after the announcement. It fell 12.3% to close at $2.36 on November 17.

Most steel companies continue to languish near multiyear lows. U.S. Steel Corporation (X) and ArcelorMittal (MT) hit 52-week lows on November 12. AK Steel (AKS) and Commercial Metals (CMC) are getting close to 52-week lows as well. Currently, AK Steel forms 4.8% of the SPDR S&P Metals and Mining ETF (XME). Cliffs forms 0.05% of the Vanguard Materials ETF (VAW).

Series overview

In this series, we’ll analyze the factors that led Cliffs to idle two of its plants in such quick succession. We’ll also discuss the current state of the US domestic steel industry amid increasing steel imports and the likely way forward. Additionally, we’ll talk about the factors that investors should look for to get a direction on Cliffs’ share price.

In the next part of this series, we’ll look at the current state of the iron ore industry and the performance of iron ore equities.

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